Office Property Valuation: Measurement Standards and Valuation Techniques

Office Property Valuation: Key Concepts and Standards

Agenda Overview

  • Definition of Office Property Valuation

  • Importance of Measurement Standards

  • Overview of Valuation Techniques

  • Regulatory Frameworks Affecting Valuation

  • Case Studies in Office Property Valuation

  • Discussion on Emerging Trends in the Industry

This module covers fundamental aspects of office property valuation, including:

  • Measurement Area and comparable rents.

  • Key valuation factors.

  • Environmental considerations.

  • Parking provisions.

  • Repair obligations.

Apprenticeship Standard: Knowledge, Skills, and Behaviours (KSBs)

This content aligns with the following KSBs:

Knowledge

  • K2: Information Management

  • K8: Ethics & Professionalism

  • K9: Client Relationships

  • K16: Applied Valuation & Appraisal

  • K18: Inspection & Measurement

Skills

  • S1: Information Management

  • S5: Consultancy

  • S12: Valuation & Appraisal

Reference Materials

Key resources for understanding property valuation and measurement include:

  • Blackledge, M. (2016). Introducing Property Valuation. CRC Press LLC, Milton. (Available from ProQuest Ebook Central).

  • RICS professional standards and guidance. RICS Property Measurement 2nd Edition. January 2018.

Valuation Recap: Rental and Capital Valuation

Rental Valuation

  • The fundamental formula to determine rent per annum is:
    \text{Rental Valuation Area} \times \text{Rent/m}^2 = \text{Rent per Annum}

Capital Valuation

  • To calculate the Capital Value:
    \text{Rent per Annum} \times \text{Capitalisation Rate} = \text{Capital Value}

Capital / Freehold Value Calculation

  • An alternative for Capital / Freehold Value uses the Year's Purchase (YP) factor:
    \text{Rent} \times \text{YP} = \text{Capital / Freehold Value}

  • The Year's Purchase (YP) is derived from the interest or yield rate (i):
    \text{YP} = (1/i) \times 100

  • Key questions arise regarding YP:

    • How is the All Risks Yield (ARY) obtained?

    • How is the correct Market Yield determined?

Office Property Measurement Standards

The RICS Property Measurement, 2nd Edition (January 2018)

  • This standard incorporates International Property Measurement Standards (IPMS) specifically for Offices and Residential buildings.

  • For all other building classes, the bases of measurement outlined in the Code of Measuring Practice, 6th Edition (COMP) may still apply.

IPMS Groups for Building Measurement

The IPMS framework categorises measurements based on their purpose and scope:

  • IPMS 1: External measurement for the whole or part of a building.

  • IPMS 2: Internal measurement for the whole or part of a building.

  • IPMS 3.1: External measurement required for exclusive occupation.

  • IPMS 3.2: Internal measurement required for exclusive occupation.

  • IPMS 4.1: Internal measurements for selected areas, including Internal Walls and Columns.

  • IPMS 4.2: Internal measurements for selected areas, excluding External Walls and Columns.

Internal Dominant Face (IDF) in Office Buildings

  • The Internal Dominant Face (IDF) is defined as the inside surface area that constitutes more than 50 percent of the lowest 2.75\text{ m} measured vertically from the structural floor surface (or to the ceiling if lower) for each Wall Section.

  • If this condition is not met, or if the Wall Section is not vertical, the Finished Surface is considered the IDF.

  • An IDF wall section refers to each internal finish of a section of an external wall. The existence of any columns is ignored if they are less than 48\text{ cm} in depth relative to the wall plane.

    • This section can either be recessed from or protrude from its adjacent section.

IPMS Component Areas (A-H)

  • Component Area A: Vertical penetrations such as stairs and lifts/elevators. Penetrations less than 0.25\text{ m}^2 are disregarded.

  • Component Area B1: External Wall area, measured between the internal dominant face and the outside face of the building.

  • Component Area B2: Internal structural elements, including structural walls and columns.

  • Component Area B3: Internal non-structural elements, comprising all internal, full-height, permanent walls other than those already included in Component Areas B1 and B2.

  • Component Area C: Technical services areas, such as lift/elevator machinery rooms.

  • Component Area D: Hygiene areas, including toilet facilities.

  • Component Area E: Circulation areas, measured horizontally (e.g., corridors).

  • Component Area F: Amenities, such as day-care or sport facilities, which are not necessarily common areas.

  • Component Area G: Retailing areas and living spaces, primarily relevant for residential properties but also applicable in IPMS 3.

  • Component Area H: Other areas, including balconies and storage rooms.

IPMS 2 Office (Formerly Gross Internal Area - GIA)

  • Purpose: Primarily used for calculating building costs and reinstatement costs.

  • Definition: The sum of the areas of each floor level of an office building, measured to the internal dominant face. This is reported on a component-by-component basis for each floor.

  • Inclusions: Internal walls, columns, and enclosed walkways or passages between separate buildings that are available for direct or indirect use.

  • Inclusions (Stated Separately): Covered galleries, balconies, and accessible rooftop terraces.

  • Exclusions: Open light wells, external parking areas, and cooling equipment.

    • Examples of areas stated separately according to the Code of Measuring Practice include covered galleries, balconies, open light wells/upper level void atriums, and open external stairways (if not an integral part of the structure).

IPMS 3 Office (Formerly Net Internal Area - NIA)

  • Purpose: Utilized for agency (marketing for rental), valuation (measurement for valuation), taxation (local tax purposes), and property and facilities management (service charge calculation).

  • Definition: The floor area available on an exclusive basis to an occupier, excluding standard facilities and shared circulation areas. It is calculated either on an occupier-by-occupier or a floor-by-floor basis for each building.

  • Inclusions: All internal walls and columns located within an occupant's exclusive area are included, using the IDF method.

  • Inclusions (Stated Separately): Balconies, covered galleries, and rooftop terraces that are for exclusive use, employing the IDF methodology.

  • Exclusions: Standard facilities that vary from floor to floor (e.g., common toilets, lift lobbies, plant rooms).

Current Market Considerations for Office Properties

  • The future demand for office space is a subject of ongoing debate, largely due to the increasing prevalence of working from home models.

  • The technology, media, and telecommunications sectors remain particularly active within the office property market.

  • Despite changes, office-based employment is still generally expected to grow.

Valuation Considerations and Comparables

When undertaking a valuation, several critical factors must be investigated:

  • Reliance on Information: The valuation report must be clear, transparent, and provide certainty concerning the information used.

  • Location and Situation: Investigations into specific attributes like car parking availability are essential.

  • Property Investigation: Understanding the type of occupier and the quantum (size/amount) of the property.

  • Environmental Investigation: Assessment of hazardous materials and air quality control.

  • Statutory Regulations / Town Planning: Compliance with and impact of relevant laws and planning policies.

  • Rating Assessment and Reinstatement Costs: Understanding liabilities for business rates and the cost to rebuild the property.

  • Tenure, Tenancies, and Covenant: Examination of property ownership, lease agreements, and the financial strength of tenants.

Repairs and Service Charges

Understanding repair obligations and service charges is crucial for valuation:

  • FRI (Full Repairing and Insuring) Lease: The tenant is responsible for all repairs, maintenance, and insuring the property.

  • IRO (Internal Repairing Obligations) Lease: The tenant is only responsible for internal repairs.

  • Service Charges: Fees paid by tenants for the maintenance and services of common parts of a building (e.g., cleaning, security, utilities).

    • The RICS Code Service Charges in Commercial Property 1st Edition September 2018 provides guidance.

    • Consideration of costs per square foot is important.

  • Relationship: In practice, a FRI lease is often considered equivalent to an IRO lease combined with service charges (FRI = IRO + Service Charges).

Valuation: Office Market Rent

The primary goal is to determine the market rent and/or market value of an office property:

  • Analysis of Passing Rent: This is an evidence-based assessment of current rents being paid.

  • Analysis of Comparables: Requires analyzing relevant transactions, noting the date, floor areas, and number of floors. Adjustments must be made for any rent-free periods.

  • Valuing Vacant Property: Market rent remains relevant even when valuing a vacant property.

  • Formula for Market Rent:
    \text{Rental Valuation Area (IPMS 3/NIA)} \times \text{Rate (£ psf or £ psm)} = \text{Rent per Annum}

Valuation: Office Market Value

Determining the market value involves considering:

  • Market Evidence: Analyzing passing rents, fair market rental value (FMRV), and sale prices to derive appropriate yields. Ensure consistency in valuation methods compared to the evidence.

  • Standard Methods of Valuation:

    • Investment Method: Often uses a comparable method to justify the market rent and subsequent yield application.

    • Comparable Method: Typically applied assuming vacant possession or owner-occupation.

    • Residual Method: Used when a property has potential for redevelopment or is nearing the end of its useful economic life.

  • Capital / Freehold Value Formula:
    \text{Rent} \times \text{YP} = \text{Capital / Freehold Value}
    \text{YP} = (1/i) \times 100

Example: Market Rent and Capital Value Determination

Problem: Determine the market rent and capital value of an office building in Telford Central measuring 3,100\text{ sqm} gross (IPMS 2 – Office) or 2,250\text{ sqm} net (IPMS 3 – Offices).

Market comparable evidence indicates:

  • Office rents are £10.50 per sq.m per annum based on NIA.

  • Freehold all-risk yield (ARY) is 9% for offices.

Key Questions:

  • Which IPMS standard should be used for rental valuation?

  • How were the 9% ARY and £10.50 per sq.m per annum derived?

Solution:

  • Gross Area (IPMS 2): 3,100\text{ sqm}

  • Net Area (IPMS 3): 2,250\text{ sqm}

    • Note: For rental valuation, IPMS 3 (formerly NIA) is the appropriate standard as comparable rents are based on NIA. Therefore, the excluded area is 3100\text{ sqm} - 2250\text{ sqm} = 850\text{ sqm} .

  • Market Rate: £10.50 per sq.m per annum (based on NIA)

  • Market Yield: 9% (0.09)

  • Year's Purchase (YP): 1/0.09 \approx 11.111

Calculations:

  • Market Rent per Annum:
    2250\text{ sqm} \times £10.50\text{/sqm/p.a.} = £23,625.00\text{ p.a.}

  • Capital Value:
    £23,625.00 \times 11.111 = £262,499.775 \approx £262,500.00

Conclusion

This session has covered critical aspects of office property valuation, including:

  • Office Property Measurement standards, particularly IPMS.

  • Crucial Valuation Factors to consider.

  • Detailed understanding of Repairs and Service Charges.

  • Practical application of Valuation methodologies.